The Narendra Modi government’s budget for 2016 was framed in the backdrop of a debate on whether to deviate from the goal of meeting deficit targets set under the Fiscal Responsibility and Budget Management Act in order to allow for enhanced public investments to counter the ongoing economic slowdown, or to stick to the straight and narrow path of fiscal prudence. That debate has been settled, it would seem, with Finance Minister Arun Jaitley’s second full budget not rocking the boat, as reflected in the decision to stick to the roadmap of reducing the fiscal deficit to 3.5 per cent in 2016-17. The bond markets have welcomed the move, as seen in yields for 10-year paper falling in response to a lower-than-expected gross market borrowing by the Centre. More than anything else, it will now give Reserve Bank of India Governor Raghuram Rajan just the required monetary space to undertake a reduction in interest rates that the economy desperately requires today. Jaitley deserves credit for not resorting to ill-advised fiscal adventurism, though the temptation for it may have been enormous, particularly in view of the elbow room presented by low oil prices.
But on the negative side, there are no indicators of a transition towards a Goods and Services Tax (GST) regime, considering that the service tax rates, too, have been left unchanged. Likewise, the decision to restrict the planned phased reduction in corporate tax to 25 per cent over a four-year period to just firms with a turnover of less than Rs 5 crore is certain to dent the pro-reform claims of the government. Similarly, the move to tax dividends at the hands of the receiver at 10 per cent, while justified given the intra-inequity issues, may send out a confusing signal keeping in mind the long history of tax treatment of this source of income and criticism about double taxation. A similar attempt made earlier during NDA 1 had to be abandoned in the face of fierce resistance from promoters and corporates and it remains to be seen whether this could be a dampener — coming as it does at a time when there is so much volatility in the market.
This, along with the significant step up in allocations for irrigation and rural roads, is probably an attempt by the Modi government to signal that this is not a “suit boot ki sarkar”, as its political opponents have alleged, although Prime Minister Modi himself had hinted earlier about the need to eliminate some of the sops being enjoyed by the well-off on many counts. Two other important initiatives are the proposal to introduce legislation to provide legal backing to Aadhaar — or the unique identity, which is key to eliminating subsidies by routing them directly to the bank accounts of beneficiaries — and a renewed push for attracting investment in the hydrocarbon sector, with production stagnant and very little fresh capital coming in.
BUT the lack of cohesiveness in the budget is reflected in the levelling of the playing field on tax treatment on the National Pension Scheme and accumulations to the Employees’ Provident Fund, which has millions of subscribers. This may well satisfy purists but is certain to invite a backlash from a constituency which is powerful. From a political economy point of view, there is nothing in the budget for the urban middle classes, even in the form of a symbolic raising of income tax exemption slabs that has been a feature of every single budget in recent years. Rather, the attempt, as this budget shows, is to appeal to a new rural constituency. This may have to do with growing rural distress and the government’s earlier response to it that was criticised as inadequate.
Overall, the approach on taxation belies the claims of the government and party of ensuring a predictable and stable regime.
The budget is also full of new cesses and other imposts that complicate the overall taxation structure.
On the financial sector front, some of the measures are welcome, though most of them are along expected lines — such as the recapitalisation of banks (where the allocation of Rs 25,000 crore may be inadequate), the strengthening of asset reconstruction companies, a dispute resolution regime for financial firms and enabling the setting up of a Monetary Policy Committee to set interest rates.
On the whole, the measures add up to a staid budget, which is, in the words of Jaitley’s predecessor, P. Chidambaram, more of a housekeeping exercise and an opportunity lost. Budgets in India are not just bland statements of intent or accounts. They are, more often, also about big ideas and real reforms, which get the animal spirits going again. On that count, there isn’t much to commend in this budget.